Menlo Company distributes a single product. The company’s sales and expenses for last month follow: |
Total | Per Unit | ||||
Sales | $ | 600,000 | $ | 40 | |
Variable expenses | 420,000 | 28 | |||
Contribution margin | 180,000 | $ | 12 | ||
Fixed expenses | 148,800 | ||||
Net operating income | $ | 31,200 | |||
Required: | |
1. | What is the monthly break-even point in unit sales and in dollar sales? |
2. | Without resorting to computations, what is the total contribution margin at the break-even point? |
3-a. | How many units would have to be sold each month to earn a target profit of $60,000? Use the formula method. |
3-b. | Verify your answer by preparing a contribution format income statement at the target sales level. |
4. |
Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34). |
5. |
What is the company’s CM ratio? If monthly sales increase by $57,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase? |
1) Break even unit = 148800/12 = 12400 Units
Break even sales = 12400*40 = $496000
2) Total Contribution margin at break even = Fixed cost = $148800
3a) Required unit = (148800+60000)/12 = 17400 Units
3b) Contribution margin income statement
Total | Per unit | |
Sales | 696000 | 40 |
Variable cost | 487200 | 28 |
Contribution margin | 208800 | 12 |
Fixed cost | 148800 | |
Net income | 60000 |
4) Margin of safety (dollars) = 600000-496000 = 104000
Margin of safety (%) = 104000/600000 = 17.33%
5) CM ratio = 12/40 = 30%
Net operating income increase = 57000*30% = 17100
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